Don't Lose Your Shirt Trading The Facebook Hype

On Friday afternoon, the story broke that Facebook's IPO filing could come as soon as this Wednesday. It probably will be the biggest IPO in U.S. history, and there are going to be millions trying to get a piece of the action. Good luck. Now the filing will provide some key data into the company, some of which we can only speculate on at the moment.

The Facebook IPO is going to be a massive event. I'm not going to try to downplay that. What I am going to do is try to help you avoid losing a ton of money before the company starts trading.

When the news broke on Friday, we saw a huge rally in many internet and social media names, and they certainly were extremely volatile. Many of these names had been hit hard over the past few months, so once they started rallying, shorts were forced to cover and the rallies grew even quicker. The purpose of this article is to show you why you should avoid these names at all cost, unless you are a day trader or someone who is watching the markets on a minute to minute basis.

My main focus will be on Renren (NYSE:RENN), the so-called Facebook of China. Renren has similar characteristics to Facebook. It operates a social media site, allows users to play games, etc. It is strongly growing revenues (50% growth expected in 2012), but analysts right now don't think the company will be profitable yet in 2012. In fact, they are only expecting the company to break even.

Renren went public in May of 2011, and traded as high as $24 on its opening day. It closed that day at $18 and was under $13 by the end of the month. It continued lower. On December 19th, the name hit a low of $3.21, a dramatic fall from its early trading prices.

Renren closed Thursday at $4.16. The 3-month average trading volume was about 4.1 million shares. On Friday, it was trading in the low $4's, even down for most of the day, until the Facebook news came out. It spiked up and was trading in the $4.80-$4.90 range for a while. Finally, it broke higher again, going through $5, and closing at $5.25. In after-hours, it rose up to around $5.50. Total volume for the entire day was over 16 million shares (including extended hours).

On Monday, shares opened higher again, and broke through $6. Near the end of the afternoon, they reached a high of $6.68. However, in a 7 minute span, the stock lost 39 cents at one point, from $6.66 to $6.27. Why is that important? Well, here's some interesting facts.

In the previous 55 trading days before Friday, Renren had only had one daily move of 38 cents. In fact, in 47 of those 55 trading sessions, it had moved less than 20 cents overall for the day. On Monday, we were seeing those types of moves in a matter of minutes. It's easy to see why you should leave trading these names to the professionals. At Monday's close, the stock was up 50% in just two days. The stock finished at $6.31, so just ask the people that bought above $6.60 how they are feeling right now. Do you think they are glad they bought into the hype? Not currently.

How much hype is there? Well, between last Monday and Thursday, nine total news stories made it to Yahoo Finance's page for Renren. On Monday, as of 5:30 pm, there were 15 stories on Renren alone, most calling it an undervalued gem to buy in wake of the Facebook news.

So what are some other names to think about here? Well, I'll break them down by category:

Chinese Internet/Media Names:

Half a dozen other names make up the Chinese Internet and Media field, many of which have risen thanks to the two words "Facebook IPO".

Baidu (NASDAQ:BIDU), which is an internet search engine, comparable to Google (NASDAQ:GOOG), was up nearly $7.50 on Friday. Baidu is not reporting earnings this week, despite what many (including myself) initially believed. Baidu is growing its search business, and is the largest market cap Chinese company in this space. It is the least risky and has held up quite well over the past several months, while other names have taken huge losses.

Sina Corp (NASDAQ:SINA), which is another Chinese internet media company, has been one of the hardest hit names until recently. The company offers online media and entertainment, including microblogging services, a twitter-like service as well as news and games. Sina had been as high as $147 in mid-2011, but fell to under $47 in December. The stock had rebounded nicely up to $62 on Thursday. Friday, the name saw a huge rally, up nearly 8 points. On Monday it traded at its highest level in more than two months. I liked this name a few weeks ago under $50, but I'm hesitant to recommend buying it at these levels after a 40% pop.

Sohu.com (NASDAQ:SOHU) is a brand advertising and sponsored search company in China, one of the "big three" along with Baidu and Sina. The stock gained almost $4 on Friday on the Facebook news, but Monday lost more than half of those gains. Sohu actually trades at a decent earnings valuation compared to many other China names. I'd be a buyer of it for that reason, not the Facebook reason, but wait for a pullback. These names pull back a lot.

YoukuInc (NYSE:YOKU), which is the so-called Youtube of China, is an internet television company. The name has gained 15% on this Facebook news. That's $3. Unfortunately, it traded up to $70 last year. The name is still above its IPO price, which is decent for the names that have gone public in the last 18 months. However, the company isn't expected to make any money in 2011 or 2012, so I'd wait until we get some profits. The name trades at the same price/sales (trailing 12 months) as Baidu, but Baidu is actually making money right now.

E-Commerce China Dangdang (NYSE:DANG) is considered the Amazon (NASDAQ:AMZN) of China. The stock rallied 20% from Thursday's close to Monday's high, but has already lost a fifth of those gains. This company has widely missed earnings expectations in the past two quarters. Despite projected revenue growth of 62% in 2011 and 58% in 2012, the company is projected to lose money in 2011 (it made money in 2010), and lose even more money in 2012. The stock has more than doubled off its lows of $4.11, and I think that's cause for concern.

These weren't the only names that jumped thanks to the Facebook news. There were a bunch of U.S. social media and internet names that saw nice gains. Here they are:

Zynga (NASDAQ:ZNGA): Zynga makes online games for sites like Facebook, including the hit Farmville. Zynga was below its $10 IPO price for a while, but thanks to an 8% pop between Friday and Monday, the stock is now above its IPO level. Zynga is up 25% since it fell below $8 in early January, and will definitely be one of the most talked about names in conjunction with the Facebook IPO. The company is profitable currently and has over $1 billion in yearly revenues, but does carry a high valuation, trading at 47 times this year's earnings and 140 times trailing twelve month earnings.

Pandora (NYSE:P): The online radio company jumped $1 on Friday, trading at its highest level since November, but shares lost a quarter of their gains on Monday. Pandora is not quite profitable yet, but it might get there in the fiscal year ending in January 2013. Even so, unless it finds a way to really improve margins, it will have one of the highest valuations of these names. Pandora is still about 50% below its all time high of $26 that it hit on the first day of trading. It has also bounced about 50% off its 52-week low. I think the company has some decent long-term prospects, but it needs to become profitable first.

LinkedIn (NYSE:LNKD): The social networking site's performance as a public trading company could end up being the model we saw for Facebook. LinkedIn went public at $45 a share, but began trading in the low $80s, and ran up to over $120 in its first few hours. It has not seen those levels since. The company pulled back to around $60 at its low but has settled in around $75 recently. It jumped $4 on Friday on the Facebook news, but lost $1.50 on Monday. The P/E on trailing earnings is over 1,000 right now, and the forward P/E will probably be in the 100s until at least 2013.

Conclusion:

While many of the names I mentioned did not jump 50% in the past two days like Renren has, a lot of these names did pop a bit and have seen recent rallies off their 52-week lows. If you want to get into Facebook, the best way is to get into Facebook, if you can. Some of these names do provide select alternatives, but not all of them are going to rise just because Facebook goes public. Also, plenty of these will have pullbacks, and we've already seen some of those during Monday trading, both during the day and in after hours.

When stocks like Renren get caught in crazy hype like this, they get very volatile, and unless you are going to day trade them, the best thing to do is to avoid them until they settle down. Renren was averaging 4 million shares a day, and then traded 16 million on Friday and about 54 million on Monday. You do not want to get involved with these names when they move as much in 5-10 minutes as they have in whole days recently. Renren has eliminated 3 months of losses in just two trading days. If you do want to get in, wait for a pullback. Don't lose your shirt trying to trade this hype.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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